Term
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Definition
| difference a firm's future cash flows with a project and without a project |
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Term
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Definition
| assumption that evaluation of a project may be based on the project's incremental cash flows |
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Term
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Definition
| cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision |
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Term
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Definition
| the most valuable alternative that is given up if a particular investment is undertaken |
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Term
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Definition
| cash flows of a new project that come at the expense of a firms existing projects |
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Term
| pro forma financial statements |
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Definition
| financial statements projecting future years' operations |
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Term
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Definition
| tax saving that results from the depreciation deduction, calculated as: depreciation X corporate tax rate |
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Term
| Accelerated Cost Recovery System (ACRS) |
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Definition
| Deprecation method under U.S. tax law allowing for the accelerated write-off of property under various classifications |
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Term
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Definition
| the possibility that errors in projected cash flows will lead to incorrect decisions. Also estimation risk. |
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Term
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Definition
| determination of what happens to NPV estimates when we ask what-if questions |
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Term
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Definition
| investigation of what happens to NPV when only one variable is changed |
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Term
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Definition
| opportunities that managers can exploit if certain things happen in the future. Also known as "real options". |
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Term
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Definition
| taking into account the managerial options implicit in a project |
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Term
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Definition
| options for future related business products of strategies |
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Term
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Definition
| the situation that exists if a firm has positive NPV projects but cannot obtain the necessary financing |
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Term
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Definition
| the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting |
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Term
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Definition
| the situation that occurs when a business cannot raise financing for a project under any circumstances |
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Term
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Definition
| the excess return required from an investment in a risky asset over that required from a risk-free investment |
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Term
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Definition
| the average squared difference between the actual return and average return |
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Term
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Definition
| the positive square root of the variance |
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Term
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Definition
| a symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation |
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Term
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Definition
| the average compound return earned per year over a multiyear period |
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Term
| arithmetic average return |
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Definition
| the return earned in an average year over a multiyear period |
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Term
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Definition
| market in which security prices reflect available information |
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Term
| Efficient Markets Hypothesis (EMH) |
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Definition
| the hypothesis that actual capital markets, such as the NYSE, are efficient |
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Term
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Definition
| return on a risky asset expected in the future |
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Term
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Definition
| group of assets such as stocks and bonds held by an investor |
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Term
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Definition
| percentage of a portfolio's total value in a particular asset |
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Term
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Definition
| a risk that influences a large number of assets. Also called market risk. |
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Term
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Definition
| a risk that affects at most a small number of assets. Also called unique or asset-specific risk. |
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Term
| principle of diversification |
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Definition
| spreading an investment across a number of assets will eliminate some, but not all, of the risk |
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Term
| systematic risk principle |
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Definition
| the expected return on a risky asset depends only on that asset's systematic risk |
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Term
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Definition
| amount of systematic risk present in a particular risky asset relative to that in an average risky asset |
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Term
| Security Market Line (SML) |
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Definition
| Positively sloped straight line displaying the relationship between expected return and beta |
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Term
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Definition
| slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate |
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Term
| Capital Asset Pricing Model (CAPM) |
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Definition
| equation of the SML showing the relationship between expected return and beta |
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Term
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Definition
| the minimum required return on a new investment |
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Term
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Definition
| the return that equity investors require on their investment in the firm |
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Term
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Definition
| the return that lenders require on the firm's debt |
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Term
| Weighted Average Cost of Capital (WACC) |
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Definition
| the weighted average cost of equity and the aftertax cost of debt |
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Term
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Definition
| the use of a WACC that is unique to a particular project, based on companies in similar lines of business |
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Term
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Definition
| the use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed |
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Term
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Definition
| the value of the firm is independent of its capital structure |
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Term
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Definition
| a firm's cost of equity capital is a positive linear function of its capital structure |
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Term
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Definition
| the equity risk that comes from the nature of the firms operating activities. |
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Term
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Definition
| the equity risk that comes from the financial policy (i.e. capital structure) of the firm |
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Term
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Definition
| the tax saving attained by a firm from the tax deductibility of interest expense |
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Term
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Definition
| the costs that are directly associated with bankruptcy, such as legal and administrative expenses |
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Term
| indirect bankruptcy costs |
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Definition
| the costs of avoiding a bankruptcy filing incurred by a financially distressed firm |
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Term
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Definition
| the direct and indirect costs associated with going bankrupt or experiencing financial distress |
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Term
| static theory of capital structure |
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Definition
| theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress |
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Term
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Definition
| a legal proceeding for liquidating or reorganizing a business |
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Term
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Definition
| termination of the firm as a going concern |
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Term
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Definition
| financial restructuring of a failing firm to attempt to continue operations as a going concern |
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Term
| Absolute Priority Rule (APR) |
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Definition
| the rule establishing priority of claims in liquidation |
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